Business-Spending Plans Improve as Fiscal Cloud Lingers

A gauge of planned U.S. business spending increased by the most in five months in October, raising cautious optimism the sharp cutbacks in capital investment during summer are abating.

Fears of deep cuts in government spending and tax increases early next year, known as the fiscal cliff, had caused firms to hunker down and last month's rebound offered some relief.

The Commerce Department said on Tuesday that non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rose 1.7 percent last month after falling 0.4 percent the prior month.

Economists, who had expected these so-called core capital goods orders to drop 0.5 percent, said the rise was encouraging, but cautioned that uncertainty surrounding U.S. fiscal policy and the debt crisis in Europe would continue hurt investment.

"The overall tone of business capital investment has been largely disappointing, as ongoing domestic and global uncertainties have continued to weigh heavily on investment decisions," said Millan Mulraine, a senior economist at TD Securities in New York.

Despite last month's bounce back, economists expect business investment to remain a drag on economic activity in the fourth quarter, noting that shipments of core capital goods declined in October for a fourth straight month.

Core goods shipments are used to calculate equipment and software spending in the gross domestic product report.

Businesses have been cutting back on capital spending, wary of automatic government spending cuts and tax increases, known as the fiscal cliff, that are scheduled to kick in early next year unless the U.S. Congress and the Obama administration can agree on a plan to cut the budget deficits.

The fiscal cliff could drain about $600 billion from an already fragile economy. Business spending is also being undermined by the long-running debt problems in Europe and slowing global demand, especially in China.

Business spending fell in the third quarter for the first time since the 2007-09 recession ended.

CONSUMERS MORE BULLISH

While business spending has suffered a setback, the housing market recovery is gaining momentum and consumer confidence is more bullish, which should help to support the overall economy.

Single-family home prices rose for an eighth straight month in September, a separate report showed. The Standard & Poors/Case-Shiller composite index of 20 metropolitan areas gained 0.4 percent in September on a seasonally adjusted basis.

Home building is expected to add to growth this year for the first time since 2005 and firming home prices bode well for residential construction activity.

"The strengthening in home prices is a plus for growth through various channels, including increased consumer spending because of wealth and confidence effects," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.

A third report showed consumer confidence hit a 4-1/2 year high in November. The Conference Board's index of consumer attitudes rose to 73.7, the highest level since February 2008, from 73.1 in October.

Stocks on Wall Street were slightly lower as investors focused their attention on the ongoing talks to avoid the fiscal cliff. Prices for U.S. Treasury debt rose, while the dollar firmed against a basket of currencies.

FACTORIES PLODDING ALONG

Despite the headwinds from the fiscal cliff and slowing global demand, the manufacturing sector remains on a modest growth path after a strong run that helped to pull the economy out of recession.

Durable goods orders were unchanged in October as gains in machinery, fabricated metal products, and computer and electronic products offset the drag from automobiles, defense and civilian aircraft.

Economists had forecast orders for durable goods, items from toasters to aircraft that are meant to last at least three years, falling 0.6 percent last month after rising 9.2 percent in September.

A gauge of planned U.S. business spending increased by the most in five months in October, but a fourth straight month of declines in shipments underscored the damage that fears of tighter fiscal policy next year are inflicting on the economy.